COSTA MESA, CALIF., JUNE 23 -- In a move that effectively kills an effort by city officials here to deny social services to illegal aliens, Housing and Urban Development Secretary Jack Kemp has decided that agency grant money cannot be withheld from undocumented residents.

In a directive sent Friday to the agency's 10 regional managers, Kemp said that "no grantee under HUD-funded community development programs can discriminate . . . on the basis of race, color, creed or alienage," provided that such services do not include cash payments or other types of "welfare."

The directive came in response to an attempt by Costa Mesa last August to bar public service groups from receiving federal grant money unless they agreed not to knowingly serve illegal aliens. The council had not stated how agencies were to go about determining the status of clients, but directors at many organizations were concerned that they would have to establish costly and time-consuming screening procedures or forgo city financial assistance.

Supporters of Costa Mesa's policy argued that the city has become a "magnet" for illegal aliens from Mexico who are seeking welfare and other benefits.

Kemp dismissed the argument, saying immigrants "are coming for jobs and to give their children an opportunity to have a better life."